Jed Kolko: Housing recovery depends on Millennials

The housing market has been one of the few bright spots in the economic recovery. The bursting housing bubble, of course, led us into financial chaos and recession a few years ago. Prices plummeted, foreclosures spiked and construction ground nearly to a halt. More recently, though, the housing market has rebounded. Prices have been climbing since early 2012, restoring much of homeowners' lost wealth and lifting many borrowers back above water. Home sales have returned almost to their long-term normal levels, and the mix of sales has swung back from foreclosures and short sales toward “non-distressed” sales. Fewer borrowers are falling behind on their payments, and there are early signs that it is finally getting a bit easier to qualify for a mortgage.

Despite the rebound in prices and home sales, however, the U.S. housing market is far from fully recovered. The clearest sign that all is not yet well is that construction activity remains way below normal levels. Even though builders are breaking ground on more new homes than in the past few years, construction activity remains around 40 percent below normal levels. (By “normal,” I mean the long-term pre-bubble historical average.) Construction activity is how the housing market gives back to the economy: construction creates jobs for workers, for manufacturers of building materials, for home-improvement retailers, and more. When construction lags, economic growth does, too.

What's holding construction back, even though prices and sales are rising? Two things. First of all, there are still a lot of empty homes across the U.S. – the vacancy rate is high. If you've been house hunting recently, you're probably surprised to hear that vacancies are high. There are relatively few homes listed for sale, but a lot of vacant homes are being held off the market. Builders are hesitant to build when vacancies are high because vacancies indicate we already have more homes than we need. Second – and more important – is that few new households are being formed. Since 2007, we've been adding only half as many new households as normal in the U.S. Without new households, those vacant homes stay empty longer and further reduce the need for new construction.

That brings us to the key point: the main reason few new households are being formed is that young adults are still without jobs and are still living in their parents' homes. During the recession, many people doubled up with roommates or lived with relatives, including young adults who stayed in their parents' homes. Even now, several years after the recession technically ended, young adults remain much more likely to live with their parents than before the recession. We estimate there are 2.4 million “missing households” – people of all ages who should be heading up their own households but are instead living with parents, roommates or others – and more than half of those “missing households” are 18 to 34-year-olds. A big reason why this is happening is that the share of employed young adults is still closer to recession levels than to normal. Young adults without jobs are much more likely to live with their parents than employed young adults are.

Millennials' job prospects, therefore, are the key to a full housing recovery. Without jobs, young people can't pay their own rent, let alone save for a down payment or qualify for a mortgage. To be clear, it's not just that young people aren't becoming first-time homeowners – many aren't even becoming renters. The longer-term health of the housing market depends critically on young people getting back to work. When they do, we should see a boost in demand for housing, as they become renters first and then buyers. I'm betting that most Millennials don't want to live with their parents forever, and most of their parents probably feel the same way. But the economy still has a long climb ahead before all those young adults get jobs, move out and head up tomorrow's new households.

Jed Kolko is chief economist and Vice President of Analytics for Trulia, an online residential real estate site.

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